Fed Up with FinReg: Rooseveltians React

Thursday, 07/15/2010 - 3:37 pm by Lynn Parramore | 2 Comments

With financial reform on its way to the President’s desk, the Roosevelt Institute’s fellows and colleagues weigh in on the bill’s weaknesses and the way forward.

Robert Johnson, Roosevelt Institute Senior Fellow and Director of the Project on Global Finance; Executive Director, INET:

Scott Brown made them go back to the woodshed, and that made them look worse once again, but other than that, the bill is the same industry-crafted/not-up-to-the-task/so-called “accomplishment” that leaves 4 out of 5 Americans in the Bloomberg survey yesterday suggesting that they wouldn’t feel protected from a future financial crash.  They missed on Too Big to Fail, on Derivatives they got about 20 percent of the way there. Gary Gensler was a positive dimension of this process at the CFTC.  His work and the introduction of Elizabeth Warren’s consumer financial protection agenda merit applause,  and that for Elizabeth herself, and not so much for the political process locating the Consumer Financial Protection Bureau in the Central Bank which, by tradition, will subordinate those concerns.  On to mortgage modification, GSE reform, reform of high frequency trading and usury limits.   This bill is forbearance.  Pressure for real reform must be sustained.  That may be the only way to deter Too Big to Fail management from being reckless again soon.  They cannot afford to unmask how weak this legislation is with another crash in the short term.

Elizabeth Warren, Harvard Law School Professor and current chair of the Congressional Oversight Panel to oversee banking bailouts:

President Obama’s leadership on Wall Street reform over the past year has paid off, and soon he will have the opportunity to sign the toughest set of financial reforms in three generations.  For the first time, families will have a tough, independent cop in Washington to help clear out the tricks and traps hidden in consumer credit agreements.

Michael Greenberger, Founder and Director of the Center for Health and Homeland Security and professor at the University of Maryland School of Law, who participated in the Roosevelt Institute’s Make Markets Be Markets conference:

In last Sunday’s New York Times, Paul Volcker, with a tinge of unhappiness and regret, graded the Dodd-Frank financial reform bill as a B-. With an equal amount of regret, I agree. But, I am not unhappy. I consider the B- a mid term grade. I say this, because the bill places so much emphasis on effective implementation. To be sure, legislative directives are now in place to guide the regulators to a path of effective enforcement. For example, for purposes of regulating the completely opaque and highly risky derivatives market — whose synthetic collateralized debt obligations and naked credit default swaps turned our economy into a unpoliced and poorly capitalized multi-trillion dollar casino– Dodd-Frank sets the contours that have the potential of converting that entire market into a fully transparent and fully capitalized environment. But, dozens of rulemakings, studies and reports stand in the way.

If properly regulated, the very kind of risky trillion dollar bets that brought down the economy can be collared, reduced and, if necessary banned. If that happens, the derivatives title would get a final grade of A. If, however, in the subterranean agency processes through which implementation will be birthed, well funded Wall Street advocacy predominates, and the progressive institutions — the unions, consumer and environmental groups, and small businesses — are checked by a lack of resources, the B- could turn into an F. In short, the fight to stabilize the economy through banning the poorly capitalized casino trillion dollar bets depends completely on regulatory follow-through. Dodd-Frank gives reformers the weapons. The question is do progressives have the staying power and resources to make a success of this legislative effort.

Thomas Ferguson, Roosevelt Institute Senior Fellow and professor at the University of Massachusetts, Boston:

The bill makes some marginal changes, but it does not attack the fundamental problems that got us into the disaster of 2008. It just ducks the too-big-to-fail problem. The large banks will continue to dominate the derivatives business, as only portions of that move to clearinghouses or exchanges. In fact, the legislation is going to lock in the positions of the largest banks. At the start of the crisis, the four largest had about 40 percent of all deposits; now they hold something like 56 percent. That will probably only increase, with all that implies for consumer choice. The legislation creates a new council of the regulators, who are precisely the people who failed in the years before 2008. There is a consumer product safety agency that’s to be established, but it’s in the Federal Reserve, which simply hates consumer product safety. And the auto dealers got exempted from regulation.

It’s easy to understand why Sen. Russ Feingold said he just could not vote for this bill — but you may get a worse bill under another Congress. The very same Congress that’s pushed this bill through at a snail’s pace also created the Angelides Commission, which is supposed to inquire into what happened and why. This, of course, is not going to report until after the November elections. And so right from the beginning you knew the folks who were pushing this bill were not serious. I mean, that is to say, if they learned anything from the Commission, they weren’t planning to use it in the bill. But they were planning to take in record amounts of campaign contributions and allow lobbyists to go wild offering them the sun, the moon, and the stars.

Mike Konczal, Roosevelt Institute Fellow:

The plan of counting on moderate Republicans instead of progressive Democrats like Cantwell and Feingold gave people like Scott Brown the chance to make crony-style changes to the bill that cheat the general public and help the biggest players. People with generic checking accounts will pay more to protect the largest hedge funds and investment banks. Is that what we want?

Wallace Turbeville, ND20 contributor and former Goldman Sachs VP:

Passing financial regulation is good politics and consumers will benefit from some protection. But the twin evils of incentivized risk taking and “too big to fail” survived. Congress did not swing and miss, but it managed only two foul balls. Perhaps we should have waited until Treasury and the Fed were past being petrified of the weakened financial system.

On bank abuse of market power, Congress did not swing and miss; the bat never left its shoulder.

During implementation, vigilance must be maintained. The banks will work overtime. They don’t see the justification for change.

Henry Liu, ND20 contributor:

Much focus has been placed on financial regulation as a way to prevent future financial market failures. It is true that the financial market meltdown that began in the summer of 2007 was the result of excessive debt, opaque debt securitization, over-leverage, underpricing of risk, banks acting as proprietary traders, credit default swaps insurance not backed by sufficient capital, etc. But the root cause is insufficient worker income to absorb rising worker productivity to generate a global overcapacity. The FinReg bill missed the target by not addressing the problem of cross-border wage arbitrage by U.S. transnational corporations.